Leveraged asset price bubbles, i.e., boom-bust phases in asset prices accompanied by credit overhangs, are more harmful than unleveraged ones, in terms of financial and macroeconomic stability. If bubbles are not all alike, neither are all bubbles likely? As bubbles are difficult to detect in real-time data, early researches focused on the macroeconomic conditions exacerbating the bubbles' nature. We specifically look at a condition that could become more persistent in the aftermath of COVID-19 pandemic: low risk-free interest rates. In an OLG model, we show that the existence condition for a leveraged bubble is more easily met than that of an unleveraged bubble with low interest rates, and thus leveraged bubbly episodes are relatively more likely to emerge than unleveraged ones. Then, we show that this result holds empirically for post-World War II bubbles in advanced economies.

Asset Price Bubbles with Low Interest Rates: Not All Bubbles are Likely to Emerge / Bonchi, Jacopo; Lucidi, Francesco Simone. - In: Social Science Research Network. - ISSN 1556-5068. - (2020). [10.2139/ssrn.3744344]

Asset Price Bubbles with Low Interest Rates: Not All Bubbles are Likely to Emerge

Bonchi, Jacopo;Lucidi, Francesco Simone
2020

Abstract

Leveraged asset price bubbles, i.e., boom-bust phases in asset prices accompanied by credit overhangs, are more harmful than unleveraged ones, in terms of financial and macroeconomic stability. If bubbles are not all alike, neither are all bubbles likely? As bubbles are difficult to detect in real-time data, early researches focused on the macroeconomic conditions exacerbating the bubbles' nature. We specifically look at a condition that could become more persistent in the aftermath of COVID-19 pandemic: low risk-free interest rates. In an OLG model, we show that the existence condition for a leveraged bubble is more easily met than that of an unleveraged bubble with low interest rates, and thus leveraged bubbly episodes are relatively more likely to emerge than unleveraged ones. Then, we show that this result holds empirically for post-World War II bubbles in advanced economies.
Low interest rates, Leveraged bubbles, Unleveraged bubbles
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Asset Price Bubbles with Low Interest Rates: Not All Bubbles are Likely to Emerge / Bonchi, Jacopo; Lucidi, Francesco Simone. - In: Social Science Research Network. - ISSN 1556-5068. - (2020). [10.2139/ssrn.3744344]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11573/1560504
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